transactions to a net zero physical delivery by the time of physical delivery, they are not required to purchase entry or exit capacity but are still required to notify the pipeline company of their transactions through nominations.

The National Balancing Point (NBP) in the United Kingdom is the oldest hub and was the most liquid hub in the European Union until it was recently overtaken by the Title Transfer Facility (TTF) located in the Netherlands. The German NCG is the third-largest hub in Europe.TTF natural gas prices are referenced throughout the world and are the gas industry’s main reference for the European continent as a whole. Figure 14 illustrates the locations of the EU virtual hubs.

Box 8. Trading transparency and churn assist market liquidity

In the United States and the European Union, the physical gas molecule may be bought and sold multiple times (churned) before actual delivery. Buyers and sellers have physical exposure and are obliged to take physical delivery and arrange for transportation or entry or exit capacity if they are unable to offset their transactions to zero before the time of delivery.

All physical transactions, irrespective of whether they go to delivery, have to be registered with the pipeline companies or the TSOs in the form of nominations. This enables the pipeline companies and the TSOs to keep track of the ownership of the gas throughout the churn. Market participants are also required to report all their physical transactions to regulatory authorities periodically.

Churn signals increase market participation and are key to increasing hub liquidity. With increased market participants, the ability of the influence of a few players to move the market diminishes. The transparency of transactions allows independent regulatory agencies to monitor activity and investigate actions that may be causing artificial price volatility and prosecute those actions if necessary.

Contract standardisation

Standardised contracts are essential for the development of markets and facilitate their liquidity and transparency. The advantage of a standardised contract is that it is well understood and so minimises transaction costs and provides a clear understanding of legal responsibilities. Pre-approved credit and/or credit-worthiness support the ease of trading and finalisation of contracts.

In the United States, the pro forma contract developed by the North American Energy Standards Board (NAESB) is the standard for gas sales and purchases at hubs. Buyers and sellers are allowed to agree on exceptions to this standard in bilateral transactions.

The NAESB is an American National Standards Institute accredited, non-profit standards development organisation formed with the support of the United States Department of Energy. The NAESB develops voluntary standards and model business practices that promote more competitive and efficient natural gas and electric markets. NAESB wholesale market standards have been adopted by the FERC and mandated as federal regulation for federal jurisdictional

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entities. The NAESB maintains a membership of over 300 corporate members representing the wholesale gas, wholesale electric, retail gas, and retail electric markets and has more than 2 000 participants that contribute to the development of the standards.

Interstate pipeline companies with well-developed or mature pipeline systems and tariffs typically establish standard non-negotiable agreements for the services it offers. Intrastate pipeline service agreements are generally negotiable.

In the European Union, the European Federation of Energy Traders (EFET) has developed standard contracts for the purchase and sale of gas at European gas hubs.

EFET is an association of European energy traders in markets for wholesale electricity and gas. EFET was founded in 1999 in response to the liberalisation of electricity and gas markets within the European Union. It is designed to improve the conditions of energy trading in Europe and to promote the development of a sustainable and liquid European wholesale energy market. EFET is steered by the secretary general and the chairman of the board. Membership of EFET requires approval by the EFET Board (EFET, 2019).

For transportation contracts, ENTSOG has developed a template contract of the main terms and conditions for bundled capacity products. The template is a requirement under the EU network code on capacity allocation mechanisms, but the application of the template remains optional for the TSOs.

Gas specifications

In the United States and the European Union, gas specifications are set by the pipeline company or the TSO in their transportation or entry-exit agreements with shippers. Shippers are required to meet the specifications to utilise the transmission services. Some pipelines or TSOs may accept off-specification gas if they can blend the gas with higher specifications to meet the market specifications.

In the United States, pipeline specifications for the composition of natural gas to be transported depend on the pipeline technical design. Pipeline companies set the gas specifications for their pipes and request approval from the FERC during the certification process. The FERC does not regulate pipeline specifications and merely ensures consistency within the market and other pipelines that may be connected to the pipeline filing the application.

A pipeline’s gas specification is defined in the general terms and conditions of the pipeline’s tariff in their agreement with the shipper.

In the European Union, the TSOs do not transfer off-specification gas between systems. LNG facilities manage pipeline specification requirements by injecting nitrogen if needed for higher British thermal unit gas prior to dispatch to the TSO pipeline network. In some countries, the TSOs have different systems for different gas qualities. Gases of different calorific values are traded separately in some countries, and in others, the TSO manages differences through nitrogen conversion without restricting shippers. For example, GTS maintains nitrogen injection in the gas grid to convert H-gas to L-gas, allowing gas to be transacted without specifying quality.

Gas is traded by its energy value, or calorific value, but during physical transportation, the natural gas qualities are different. In the United States and the European Union, shippers are

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